Currency catastrophe

Occasional corrective interventions in the market cannot be counted upon for the long term.

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The fact that the Bank of Israel resumed its massive US dollar purchases on Tuesday should indicate even to laymen that something is very amiss in our currency markets. Just a few weeks ago, BOI Governor Stanley Fischer stopped stocking up on the greenback as a means to keeping the shekel sensibly down. But on Tuesday, as the dollar continued its seemingly unstoppable slide southwards, Fischer bought a whopping half-billion dollars during trading hours alone, and kept on buying after the financial markets officially closed.
Fischer must have had very pressing and compelling reasons for so extreme a shift in tactics. Trouble is that the shekel continues to rise in value while the dollar falls. Nothing seems capable of stopping the shekel's over-valuation (and that's what it is), and this jeopardizes exports and reduces tourism-generated income.
Israeli products and services become uncompetitive. Some companies are forced to fold, shrink or move their hub of activity out of the country. Take Tadiran Appliances, for instance. It has sacked 300 Afula employees and will begin producing air-conditioners in China.
Any of these repercussions of the overpriced shekel are potentially disastrous; all of them mean layoffs. Indeed the World Economic Forum's Global Competitive Index for 2009-10 shows Israel descending to 27th place from 23rd a year ago. Three years back we were 14th.
Trying to reduce currency-market fever, Fischer has amassed huge dollar reserves - some $54 billion. That adds up to more than $7,500 per capita. Only Japan and Switzerland hold larger per capita stockpiles. The scale is far beyond any framework Fischer had contemplated when he started buying dollars.
The dollar is falling against all major currencies, but there is a local aspect, too. The shekel is stronger than Israel's economy justifies. It is rising against other currencies as well.
Manufacturers Association President Shraga Brosh, who is expected to discuss the pumped-up shekel with Finance Minister Yuval Steinitz today, claims that Israel is being strategically targeted via concerted speculative attacks by foreigners. He claims that the unrealistic exchange rate is to Israel what the Lehman Brothers debacle was to America.
International speculators plainly bet on a currency going up or down, cash in, and quickly clear out. Brosh argues that they are easily identifiable. He wants their massive transactions taxed as a deterrent. Others counter that such transactions are not so easily detected and that Brosh's remedy would sit ill with overseas investors wishing to do business here.
A rival proposal is reintroducing the ceiling and rock-bottom limitations on shekel fluctuations as they existed here during the 1990s. Others suggest even greater regression to the system of devaluations which grated on Israelis' nerves for most of the state's history. Politically, any administration would be loath to opt for either of these unpopular notions.
The idea of linking the shekel to the euro, meanwhile, seems unworkable, not least because Israel has no impressive euro reserves and it would make little sense to buy expensive euros with cheap dollars. The beneficiaries, in any case, would be only those firms dealing with EU states, not those doing business with America or the Far East.
DESPITE THE dilemmas, two things remain clear:
Firstly, Fischer cannot go on hoarding dollars ad infinitum. His purchases to date have not pegged the shekel down to the desired levels. Buying more entails printing money, ergo inflation. Secondly, the exchange-rate catastrophe-in-the-making must be jointly addressed by the prime minister, the finance minister and the BOI governor before it mushrooms uncontrollably. It's imperative that the shekel-dollar rate be raised to a viable 4:1 or thereabouts, and that an even keel be maintained thereafter.
Occasional corrective interventions in the market cannot be counted upon for the long term and are destabilizing in themselves, being plainly necessitated by dire circumstances.
If the past year's worldwide crunch proved anything, it is that all and any regulation must not be regarded as a bete noir. The increasingly undeniable fact is that Israel cannot leave its currency exchange completely to the mercies of market forces, especially not in times of crisis.

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